IMPLIEDSCENARIO

Calculate the implied scenario estimates that reconciles with your target scenario probabilities.

Description

Solve for a modified set of implied scenario estimates given target probabilities. Reconcile your views on target scenario probabilities with implied scenario estimates across economic variables. The function follows the research published in the Journal of Portfolio Management, March 2020.

Enhanced Scenario AnalysisThe Journal of Portfolio Management

Journal of Portfolio Management research paper: Enhanced Scenario Analysis

Syntax

The following describes the function signature for use in Microsoft Excel's formula bar.

=IMPLIEDSCENARIO(prTarget, initialScenariosEstimates, anchor, covariance)

Input(s)

Argument	Description
prTarget	Required. Row vector of target probabilities.
initialScenarioEstimates	Required. Matrix of initial scenario estimates where each column corresponds to a scenario and each row corresponds to an economic variable.
anchor	Required. Column vector of anchor estimates across economic variables.
covariance	Required. Covariance matrix of economic variables.

Output(s)

The function returns a matrix of implied estimates, $s_{m,n}$, across $M$ economic variables and $N$ scenarios. The reconciled probabilities, $p$, of the implied scenario estimates are included in the final row of output.

$$\text{output} = \quad \begin{matrix} s_{1,1} & s_{1,2} & \cdots & s_{1,N} \\ s_{2,1} & s_{2,2} & \cdots & s_{2,N} \\ \vdots & \vdots & \ddots & \vdots \\ s_{M,1} & s_{M,2} & \cdots & s_{M,N} \\ \hline p_1 & p_2 & \cdots & p_N \end{matrix}$$

Example

44KB

IMPLIEDSCENARIO.xlsx